Are retention bonuses just a new corporate scam?

I’ve always stood in wonder of how some corporate executives survive. They bumble and bungle along, slowly bringing the company down, and then, when the wheels finally start to come off, they take their golden handshake and golden parachute and sail off to another company where they get a bigger salary. There they start the downward spiral all over again.

While I don’t have a well-developed ethical theory around this, it’s always seemed to me to be unfair that the people who worked their tails off and have the most to lose — the lower-level employees — get the short end of the stick when things turn bad. They lose their jobs, their health care, and maybe all or part of their pensions. At the same time, those who made all the bad decisions are rewarded. I guess it’s just part of the “genius of capitalism,” as our esteemed Treasury Secretary Paul O’Neill would say.

But now there’s a new wrinkle. A company finds itself in dire straits. Thousands are laid off, not because their departure will help the company become profitable, but to “send a message to Wall Street.” As the company heads toward Chapter 11, creditors, as well as employees, stand to lose. But not the executives. They start to vote themselves “retention bonuses.”

These bonuses aren’t rewards for doing a wonderful job. These are pretty much just incentives — which is a charitable word — to keep them from jumping ship before it gets too close to the rocks, ostensibly to make sure that the stockholders and creditors get the best deal possible in the coming disaster.

Explained that way it seems to make sense, but on closer scrutiny that explanation begins to fall apart pretty quickly. We’re not talking here about people who come in, punch a clock, and do their job until the whistle blows. These are people who receive extraordinary salaries — many times greater than those of lower-level employees — along with company cars, country club memberships, stock options, deferred compensation, and a host of other benefits not even imagined by the rank-and-file employees.

The only way to justify this sometimes obscene array of salary and benefits is to claim that the person being so compensated has an extraordinary commitment to the company — and especially to the stockholders, who are paying him (it’s still rarely a her) to act in their best interests.

I could argue that this arrangement creates a mutual set of obligations. The stockholders, through the directors, are obligated to live up to their end of the bargain and keep the money flowing from the corporate treasury to the executive. The executive, for his part, would have a similarly strong obligation to continue to act in the best interests of the stockholders.

How about when the going gets tough? Can’t the executive claim that he has the right to move to a more profitable organization and cut his losses? Two things argue against that. The first is that recent evidence shows that a declining economy and a falling stock price don’t always have a negative impact on executive compensation. Sometimes they do, but in many other cases executive salary has increased as layoffs have increased and the price of the stock took a nosedive.

The most compelling argument, however, is that the executive’s obligation to the company increases, rather than decreases, when thing start going poorly. This is when the company needs the very expertise and commitment for which it has paid so dearly. For an executive to leave at this point would be similar to a lifeguard staying at his or her post and collecting a salary so long as no one is in trouble. If the guard were to resign as soon as someone called for help or to demand more money to help in the rescue, we’d probably find that ethically indefensible.

For a top-level executive to leave a foundering company — especially when that executive has been instrumental in its downfall — is a form of abandonment that would be tolerated in no other profession. For that same executive to say or even hint that he will leave unless he is paid a special “bonus” may be legally permissible, but ethically it borders on extortion. The directors who agree to such a payment are complicit.

Perhaps a better way to keep executives on board a failing ship is to tie their deferred compensation to their faithfulness to their obligations. Or maybe they should be required to pay back the real cost of all the perks they have received — corporate jets, country club memberships, interest-free loans — if they leave prematurely. Maybe a combination of both would instill some sense of duty.

Let me know what you think. Join our Ethics Matters forum at www.infoworld.com/forums/ethics or write to me at ethics_matters@infoworld.com.